This Streaking Cigarette Stock Could Return More Than 12% This Year

NEW YORK (TheStreet) -- There is one cigarette stock with a whopping 5.1% dividend yield and surprisingly solid growth for a business in a slowly declining industry. Since 2008, this company has grown revenue-per-share by 9% a year and dividends-per-share by about 12% a year. The company is expected to grow earnings-per-share about 7.5% a year over the next several years. The company's current dividend yield of 5.1% plus its expected earnings-per-share growth of 7.5% could give shareholders a total return of 12.6% a year for the next several years.

It is none other than Philip Morris International (PM). Philip Morris International was created in 2008 when Altria (MO) spun-off its international tobacco division. Philip Morris International sells Marlboro, Parliament, and Virginia Slims (among other brands) internationally. The company has no sales in the U.S. Despite this, Philip Morris International is the largest tobacco company in the world with a market cap of $131 billion.

Philip Morris International's first quarter 2015 results exceeded analyst's expectations. The company saw constant-currency adjusted-earnings-per-share surged 23.5% versus the same quarter a year ago. Cigarette shipment volume unexpectedly increased 1.4% versus the same quarter a year ago. Cigarette shipment volume was up 4.4% in the important Eastern Europe, Middle East, and Africa segment. Market share gains drove volume growth for Philip Morris. The company also benefitted from a shift to higher priced cigarettes in the quarter versus the same quarter a year ago and from reduced expenses from increased operating efficiency. The market responded favorably to Philip Morris' excellent results, sending the stock over 8% higher.

Growth Prospects

Philip Morris International has managed to grow earnings-per-share and dividends-per-share despite overall volume declines in the cigarette industry. The company has accomplished this through share repurchases and through the strength of its premium Marlboro brand. Since 2008, Philip Morris International has reduced its net share count by 4.2% a year.

The Marlboro brand has given Philip Morris International large market share around the globe. The company grew market share in the European Union (now up to 39.6%), North Africa, and Russia in its most recent quarter. The company has grown revenue at 4.4% a year since 2008 thanks to market share gains and price increases, which have more than offset volume declines.

Philip Morris International has proven over the past seven years that it can raise prices as fast as governments increase cigarette taxes. Tobacco products are highly addictive and, as a result, the demand curve for tobacco products is inelastic; consumers will not cut back much despite price increases.

Going forward, Philip Morris International should be able to continue growing earnings-per-share somewhere between 6% and 9% a year. The company will realize this growth through market share gains in the premium cigarette category, strong share repurchases, and price increases that offset the negative effects of cigarette tax increases.

Philip Morris International is currently trading at a price-to-earnings ratio of just 16.3 which is well below the S&P 500's current price-to-earnings ratio of 20.6. Historically, the company has traded at a price-to-earnings ratio just under the S&P 500's price-to-earnings ratio.

Investors will eventually catch on to Philip Morris International's market-beating expected total return and drive the company's price-to-earnings ratio above that of the S&P 500's to reflect its better return potential. A fair price-to-earnings ratio premium for Philip Morris International is about 1.05 to 1.1 times the S&P 500's price-to-earnings ratio.

Philip Morris International is also trading below its peer group's price-to-earnings ratios: